NEAM Insights

Executive Summary Steep unrealized investment losses during the COVID-19 pandemic and the rapid rate increase in 2022 have led insurers and some regulators to refocus on stress and scenario testing. This article explores metrics for quantifying losses during periods of stress, suggesting that incorporating them into portfolio construction and rebalancing can lead to more informed investment recommendations that better align with insurers’ risk-adjusted return preferences. Read More

Executive Summary In 2024, the U.S. life insurance industry’s net investment income increased by 25 bps, extending the upward trajectory observed in 2023. This growth was primarily supported by persistently elevated interest rates. Read More

Executive Summary In 2024, the U.S. Property and Casualty (P&C) insurance industry’s net investment income reached a decade high of 3.63%, supported by elevated interest rates and increased equity dividend income. Over the past three years, one large insurer has notably influenced industry asset allocations by reducing its exposure to Schedule BA assets and equities, while increasing holdings in cash and short-term investments. Excluding this outlier, the industry’s overall asset mix has remained relatively stable. Meanwhile, the fixed income portfolio experienced a continued increase in book yield, along with improved credit quality and stable duration. The industry’s allocation to tax-exempt municipal bonds declined steadily, replaced by growing investments in corporate bonds and structured securities. Read More

Asset-Centric Optimization An asset-centric optimization focuses solely on the investment portfolio, aiming to maximize the investment return based on the risk tolerance towards the assets, without directly considering liabilities. Read More

Introduction The collapse of Silicon Valley Bank in 2023 served as a wake-up call for the banking industry, highlighting the critical importance of asset liability management (ALM). Banks may need to liquidate assets to meet customers’ cash flow needs, sometimes realizing losses at inopportune times. This focus on ALM is not unique to banking; it is also a cornerstone of risk management in the insurance industry. Life insurance companies, in particular, employ ALM approaches to manage risk. Their investment portfolios need to be “liability-driven” due to the unique nature of their life insurance and annuity products. When it comes to Property and Casualty (P&C) insurance companies, the benefits of incorporating asset liability duration matching in constructing asset portfolios are less clear. Unlike life insurance companies, P&C insurers deal with shorter-term and more unpredictable liabilities, such as claims from natural disasters or bodily injury, potentially leading them to perhaps think about ALM differently. This paper will first outline the various ALM approaches used by life insurance companies. We will then examine the enterprise, fixed income, and liability profiles of P&C companies based on the latest public statutory statements. Read More

Executive Summary In this issue, we examine the enterprise profile and investment characteristics of U.S. fraternal insurers, drawing comparisons with the broader U.S. life insurance industry. Despite being generally smaller in size, fraternal insurers have recorded comparable investment income (expressed as a percentage of invested assets) with the broader industry over the past four years. However, the fraternal composite’s fixed income portfolio book yield has been lower compared to the life industry, and the gap between the two groups has widened since interest rates began to rise in 2022. While the fraternal composite’s fixed income credit quality was in line with the rest of the life industry, duration and sector allocation differences may have been contributing drivers to the lag in book yields. Read More

EXECUTIVE SUMMARY This issue of Perspectives explores the evolution of the risk and return profile of the U.S. property and casualty (P&C) industry over the past 20 years ending in 2023. It is an update to a previous Perspectives, “Enterprise Risk Capacity: Shifts in Risk” published in January 2022, that focused on data as of year-end 2020. Our motivation for this update was to evaluate if or how the industry’s risk profile evolved given the impact of the Covid-19 pandemic and subsequent dramatic changes in interest rates and inflation since 2020. Our financial performance and analysis consider statutory accounting and related filings. Read More

EXECUTIVE SUMMARY Property and Casualty (P&C) insurers primarily invest in high-quality fixed income securities. Risk assets such as below investment grade bonds, equities, and alternatives complement these portfolios, but guidance on optimal proportions is often unclear. The risk asset “smile” analysis is an economic, mark-to-market framework that shows that preferable ranges exist, and warns that too little exposure or risk-asset reductions can increase investment risk and lower return. Interestingly, the P&C industry appears well positioned in the aggregate. Read More

Executive Summary Asset allocations within the U.S. Property and Casualty (P&C) insurance industry have remained largely consistent, with bonds, equities, and Schedule BA assets representing the top three sectors. In 2023, the industry’s holdings in cash and short-term investments surged to an unprecedented 8.3%, a trend likely driven by attractive short-term interest rates. Read More

Executive Summary In 2023, the asset allocations of the U.S. life insurance industry have remained largely stable, with bonds, mortgage loans, and Schedule BA assets representing the top three sectors. In contrast, the industry’s holdings in cash and short-term investments soared to an unprecedented 3.5%, a surge likely driven by attractive short-term interest rates. Consequently, the overall net investment income increased. Read More